Category Archives: finance

If the ice cream fall off your little brother’s ice cream cone, by some bizarre combination of probability/randomness and physics and through nothing that’s really his fault, it’s reasonable for your mother to ask you to split the rest of your cone with him. it might not be fair to you, strictly speaking, but it’s not rewarding him for bad behavior. and even though it might not seem like it at the time, it’s in your best interest to help your brother out (you’re going to need each other down the line…)

listening to Marketplace this week, I had to think twice about what I thought I heard from FDIC Chairwoman Sheila Blair (I actually can’t confirm now if it was her, I can’t find any mention of the interview on Marketplace).

she was responding to the issue of Fairness, and the complaints she had heard that bailing out people in bad mortgages was not fair. this argument is based on the fact that these mortgagees entered into contracts that are legal and ought to be binding, and if they were misled by market prices and trends that is a risk all home buyers bear. why should the majority of people that have made prudent, measured, informed mortgage decisions bail out those who have not? “it’s not fair!” — (I’m not whining or arguing this point right now, I’m just re-stating the argument.)

Blair’s response to the argument, that the responsible should not have to bail out the irresponsible, was one we’ve all heard before, that ‘life isn’t always fair’

it’s something I say myself, pretty frequently. but it’s different to say ‘life isn’t fair’ when you’re dealing with things that are probabilities and uncertainties. you can’t expect fairness when you’re talking about occurences of terminal diseases, or car accidents, or getting ripped off by a vending machine.

‘life isn’t always fair’ is an acceptable response to people who bought more home than they could afford, with mortgage products (ARMs, etc) that are relatively new and which they probably didn’t fully understand, on the underlying assumption that the housing market bubble would never burst. people were playing the real estate market like it was the stock market — speculating, flipping, almost day-trading — and very very few people try to argue that the Dow dropping “isn’t fair”. (a few do, they typically sue a specific companies management, not their brokers or the market in general.)

but ‘it isn’t fair’ does seem like a perfectly good argument against government action — intentional action, not a random or probabilistic outcome — that aims to pacify a constituency, paying for their failures on the backs of taxpayers and those who managed to not default on their mortgage.

if your little brother stacked his ice cream higher than he could support and started spinning in circles, dizzying himself and spilling his ice cream, it would be unfair of mom to ask you to share the rest of yours. even more unfair for mom to force you to share — and as nicely as they try to make it sound, the government never asks you to do anything… just try withholding the portion of your taxes that represent your portion of the mortgage-bailout, and let me know how that works out.

my proposition

yikes, I almost didn’t get to the point.

I believe the proposal Blair was pitching

refinances the mortgage so that the monthly payment is no more than 1/3 of their monthly salary

AND resets the principle of the mortgage to 95% of the current market value of the home.

to make those variables jive, the mortgage principle may need to be a lot less than then they owe to the bank. it’s not clear who is supposed to eat that additional cost — the bank? the Feds/taxpayer?

here’s my proposal:

principle owed stays the same: nobody takes a loss

government secures lowest reasonable interest rate

term of loan extended out as far as possible to get the payment down to 35% of income

if monthly payment with term of infinity still exceeds income %, you accumulate more debt until death (“infinite term” doesn’t make sense, does it? — just call it a perpetual interest-only loan. ie. “you’re renting from the bank”)

if the bank thinks you might die before you pay off, they have an ‘insurable interest’ in you and can buy life insurance to cover the mortgage in the event of your death

odds are really good that the housing market will rebound (at least getting your equity back up to zero) before you die. and if not, you’re dead anyway and your heirs don’t owe anything to the bank. insurance companies make these policies all the time; they won’t lose money. from what I can see, everyone wins.

MR. RUSSERT: But, Senator, many people opted for those cheaper mortgages. They could’ve had a fixed mortgage at a higher rate, but they opted for a cheaper one. Should they not bear some responsibility?

SEN. CLINTON: Well, Tim, I think all of us should[1]. But I’d say three things about that. The bankers, the mortgage lenders, the brokers, all bear a lot of the responsibility, because many of the practices that were followed were just downright predatory and fraudulent. There is no doubt about that[2]. I started talking about this last March. A lot of people got into subprime loans who frankly could’ve been in a conventional fixed-rate loan. They were basically told that this was a better opportunity for them. Should they take responsibility? Yes, but[3] look at what will happen if we continue this cascade of foreclosures. Housing values are down. They’re down 6 percent[4]. That’s over $1.3 trillion in housing values in the last year. So everybody bears some responsibility[5].

[1] I, for one, bear no responsibility for any part of the subprime mortgage crisis, and I call shenanigans on Hillary Clinton for implying that I do. If anyone can prove otherwise, have at it.

[2] I think there is plenty of doubt in her claim that practices were predatory and fraudulent; sure, some may have been predatory, and some fraudulent, but I doubt that many were both. If they were fraudulent, borrowers should have no problem demonstrating as much and get back their losses plus damages.

[3] this “yes, but” clause is mixing issues; the state of nationwide housing values has no bearing on personal responsibility. Should I stop paying my car loan because the price of gas is over $3? Right.

[4] housing was a bubble anyhow, and the dramatic drops are more a function of that bubble than of 0.3% of houses being foreclosed (not that the foreclosures help the situation).

[5] Again, I refute this claim on it’s face, and object to any responsibility that Hillary is trying to project on me or my family. It doesn’t take a village to screw up a home loan.

the other day, when I admitted that I didn’t understand exactly what this whole sub-prime lending situation was, someone convinced me that the loans were being made at lower than the prime rate (sub-“prime rate”). that sounded absurd to me — how could a bank loan at less than the incredibly low interest rates that were available to prime borrowers? convinced is a strong word — I objected, and they persisted, so I stopped arguing with them (A HA! I shouldn’t have caved — may that be the last time I ever do THAT!)

The term “subprime” refers to the credit status of the borrower (being less than ideal), not the interest rate on the loan itself.

alas, I didn’t have Wikipedia available when I was having that discussion. am I the only guy that wishes I had the Internet available in my peripheral vision at all times, just like the Terminator and his heads-up display? that should be available soon enough, I imagine.

think about what a “state of the art” car cost in 1985. the consumer price index (CPI) tries to tell us all what that car costs today. for the sake of argument, let’s say it was $10,000 then and $25,000 today. but did the car in 1985 have airbags? power locks and windows? as much horsepower? 600 watt stereo?

hedonics tries to reconcile this, saying that — where applicable — products today are better than they were in the past. the number crunchers don’t do this arbitrarily, they have all kinds of functions to determine how much better products are. but seriously, computers have multiple times more power, the “state of the art” TV is bigger and sharper and might have DVR built in…

the problem, according to some, is that the CPI/inflation numbers as reported may be lower than reality because the government might abuse hedonics. if true, we aren’t cruising along with the very low inflation we thought we had and might be relatively worse off. of course, when I look at all the modern conveniences that average households have, I have a hard time believing our collective standard of living as a country is going down.

He did not specify if the market analysis is ‘settled’ or not, but the ‘analyst concensus’ is that he is right. </sarcasm>

No mention in the article that Gore is Chairman of Generation Investment Management. GIM has already bought into their ‘green’ firms, now they’d like the rest of the pension plan managers to do the same. Seems like that would warrant some kind of disclosure statement…

Brilliant business strategy, I’m not arguing against that. But if VP Cheney did the same thing, he’d be accused of being a profiteer. (That sounds familiar for some reason.) Instead Gore is lauded as the planet’s savior. Whatever.

Second, a certain class of pundits and politicians are quick to see any increase in income inequality as a problem that needs fixing—usually through some form of redistributive taxation. Applying the same philosophy to leisure, you could conclude that something must be done to reverse the trends of the past 40 years—say, by rounding up all those folks with extra time on their hands and putting them to (unpaid) work in the kitchens of their “less fortunate” neighbors. If you think it’s OK to redistribute income but repellent to redistribute leisure, you might want to ask yourself what—if anything—is the fundamental difference.

God bless the few who have resisted the temptation or have mastered techniques to beat the credit card companies at their own game. But for the vast majority of us, these carry-in-your-wallet loans can be a blessing and a curse.

Wait, you mean somebody has actually figured out how to not be brutally raped by the credit card companies every month? Who are these precious ‘few’ financial wizards, and can they teach these secrets to the rest of us? Until then, who will find a way to protect us from these predatory institutions?!?!

Oh, what luck, it was a Senator that made the observation above. Whew. Now if only someone would DoSomething…

[headline in no way endorses that company — never had a card from them, never will]